Tuesday, December 27, 2011

As December comes to an end, I am thinking of some initiatives undertaken this year. One stands out, as it is rather recent and it is in the process of being evaluated to make it even better: our Financial Literacy Seminar Series. Started last October, this is a joint project between the George Washington University School of Business and the Federal Reserve Board (FRB) with the goal of hosting cutting edge research on financial literacy. We invited all individuals and institutions interested in financial literacy in the Washington, DC, area, and because presentations have been taped and posted on the web, everybody who is interested in financial literacy can watch the presentations or read the papers. They are posted on the seminar’s web page: http://business.gwu.edu/flss/.

We had a distinguished group of speakers in the fall term. Our inaugural seminar was given by Olivia Mitchell from the Wharton School, whose talk examined the link between financial literacy and wealth accumulation. Her talk was followed by a panel of policy experts, including Gail Hillebrand from the Consumer Financial Protection Bureau, Karen Dynan from Brookings, and Jason Fichtner from George Mason University (formerly the Deputy Commissioner of SSA). In subsequent seminars, Robert Clark from North Carolina State University presented his work on workplace financial education, a very important topic when looking at financial education for the adult population; Stephan Meier from Columbia Business School examined the link between financial literacy and subprime mortgages, showing that numerical ability is strongly associated with mortgage delinquency and default; Bilal Zia from the World Bank presented an evaluation of financial literacy programs in India; and Jonathan Zinman from Dartmouth College examined household debt and, in particular, credit card debt and the way it could be managed better. Our last speaker was Brigitte Madrian from Harvard University. She reported on some important features of default options, i.e., the fact that when employees are automatically enrolled into pensions, many of them stay enrolled at the default rate, even when that rate is a “bad” one and unlikely to correspond to a rate that the individual would have chosen had he/she made an active choice. Most importantly, the employees who tend to stick to the default are disproportionately those with low income, which is often a proxy for low financial literacy.

Different seminars in the series had different formats. While the majority of talks were given by academics, at times we had a discussant or, as mentioned above, a panel of policy experts. Even without a discussant, our audience had so many experts in this field that there always was a very lively discussion with many questions asked of the speaker. To continue the discussion in a less formal setting, we held a reception after the seminar so that participants could continue the discussion with either the presenter or other attendees (sometimes with the help of a glass of Italian wine). The Dean of the Business School would also stop by the reception to greet the speaker or meet the attendees and to hear how the School could continue to promote financial literacy.

One of the privileges of organizing the seminar series is that I get to meet with the seminar speakers, discuss their paper in depth, hear in more detail their views and their insights as well as learn about their future projects. Another equally important privilege was getting to know and work with a group of researchers from the Federal Reserve Board. They have been a great group to work with: they combine an interest in theoretical and empirical research with a focus on policy; they ask important questions and have very high standards for research. Together, we were unstoppable; we started to work on the series in August and in October we were ready to start.

And speaking of privileges, last June, I had the opportunity to meet with Chairman Bernanke. Sitting in his elegant office at the FRB, I told him about the projects that our teams at the Financial Literacy Center (FLC) were working on and what we were doing to promote financial literacy. He proposed more interaction between the researchers working on financial literacy and the researchers from the Federal Reserve Board and suggested organizing some joint activities. As a result, the Financial Literacy Seminar Series was born, and it benefits from the financial support of the Federal Reserve Board. Because the end of the year is a time for evaluation, I have to say I am very proud of our new Financial Literacy Seminar Series. And I am especially proud of being a student of Ben Bernanke.

Thursday, December 8, 2011

The front page of the Wall Street Journal last Monday, December 5, had three pictures of a woman in tears. That woman is Elsa Fornero, the Welfare Minister in the new “technocratic” government of Italy. The fact that she was in tears was truly remarkable and it deserved to be on the front page of a major business newspaper. This is something new, and there is a lesson to be learned from it.

Elsa Fornero, a professor of Economics at the University of Turin, is an international expert on pensions. In charge of one of the most difficult reforms, i.e., changing the pension system in Italy, she has set out to implement a set of new and severe measures that nobody before her has been able to do, even though the current system is unsustainable.

Reforms might be right, but they are painful, and the fact that they are necessary does not alleviate any of the pain they inflict. Technocrats normally describe necessary reforms as the inevitable medicine that a country has to swallow to get better; the numbers are on their side, and no one had ever shed a tear when reform might mean that someone wouldn’t be able to pay their bills at the end of the month. But not Elsa Fornero. The woman who, for more than forty years, has done the calculations about the pension system in Italy; has shown in many scholarly papers that the Italian pension system is unfair, inefficient, and too expensive; has set up a center to study this topic in the most rigorous way, looking at data both in Italy and in other countries, was there at center stage to announce her reforms. The new Minister, who was appointed for her unique expertise, stopped speaking at the very moment she had to pronounce the word “sacrifice”—and cried.

This is not only a sign of humanity, a recognition that reforms often equal pain, but also an act of humility and of immense courage. It took a woman to attack reform of one of the most difficult and stubborn pension systems. She had one week to do it. She knew what to do and what was necessary. And when she described it, she told it as it is, and she cried.

I hope this is the start of a new phase both for politics and for women. Politicians need to have the skills and good judgment to set countries on sustainable paths and (financially literate) citizens should hold them accountable. And I hope we are done with the “iron lady” and similar clichés about women in command. I highly recommend that other Italian politicians be so bold in their actions as the Fornero reforms, as well as show that they care about the well-being of their fellow citizens. We all can learn from Elsa Fornero to be ourselves; in her case, a woman who cares. When I grow up, I want to be Elsa Fornero.

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About Me

Annamaria Lusardi is the Denit Trust Endowed Chair of Economics and Accountancy at the George Washington School of Business. Previously, she was the Joel Z. and Susan Hyatt Professor of Economics at Dartmouth College. She has taught at Dartmouth College, Princeton University, the University of Chicago Public Policy School, the University of Chicago Booth School of Business and the Graduate School of Business at Columbia University. From January to June 2008, she was a visiting scholar at Harvard Business School. She has advised the U.S. Treasury, the U.S. Social Security Administration, the Dutch Central Bank, and the Dartmouth Hitchcock Medical Center on issues related to financial literacy and saving. She is the recipient of the Fidelity Pyramid Prize, awarded to authors of published applied research that best helps address the goal of improving lifelong financial well-being for Americans. She holds a Ph.D. degree in Economics from Princeton University.